Loan waiver: Not an election winner

Political ploys initially hailed as master-strokes often end up as flops. I suspect this will happen to the Rs 60,000 crore farm loan waiver announced in the budget. It writes off 100% of overdues of small and marginal farmers holding up to two hectares, and 25% of overdues of larger farmers.

Finance minister P Chidambaram has been congratulated both by economists (who think the waiver will relieve rural distress) and Congress colleagues (who think the waiver will win them the next general election). I suspect the waiver will fail in both its economic and political objectives.

India has enjoyed 8-9% GDP growth for four years, but the boom has bypassed many rural areas. Farmer distress and suicides have made newspaper headlines. Various attempts to provide relief (employment guarantee scheme, public distribution system) have had little impact, thanks to huge leakages from the government’s lousy delivery systems. So, many economists think the loan waiver is a worthwhile alternative to provide relief.

The aim is worthy, but not the method. The poorest rural folk are landless labourers, who get neither farm loans nor waivers. Half of small and marginal farmers get no loans from banks and depend entirely on moneylenders, and will not benefit. Besides, rural India is full of family holdings rather than individual holdings, and family holdings will typically be much larger than two hectares even for dirt-poor farmers, who will, therefore, be denied the 100% waiver.

IRDP loans to the rural poor in the 1980s demonstrated that crooked bank officials demand bribes amounting to maybe one-third the intended benefits. This will surely happen in the new loan waiver too.

After the last farm loan waiver in 1990, many banks went slow on fresh farm loans for some years. Chidambaram’s waiver will similarly slow down fresh loans to deserving farmers.

In sum, only a small fraction of deserving farmers will benefit, most will get only a fraction of the promised benefits, and many undeserving defaulters (and crooked bank staff) will be significant gainers.

Economist Surjit Bhalla says less than 5% of farmer loans to banks are overdue. If so, then the 95% who have repaid loans will not benefit. They will be angry at being penalised for honesty. The beneficiaries will include some of the truly distressed who merit relief, but will also include cynics who can afford to repay but have not done so, anticipating a waiver.

Chidambaram says the waiver will benefit 40 million farmers. This amounts to almost half of India’s 90 million farm households. But only a fraction of farmers have bank loans, and only 5% of these are overdue, according to Bhalla.

Going by this calculation, overdues should exist for only 2.25 million farmers. Overdues to co-operatives may be higher. Yet, it is impossible that half of India’s farmers are defaulters: bank experience is far, far better.

So, the budget grossly overestimates the number of beneficiaries. It also underestimates the negative effects of the waiver-encouraging wilful defaults in future, discouraging fresh bank lending for some years.

What is the alternative? I have long argued that instead of trying to reach the needy through a plethora of leaky schemes that let very little through, we should transfer cash directly to the needy, using new technology like biometric smart cards and mobile phone bank accounts.

This technology is being tried in a pilot project in Bihar. It needs to cover all India. Then benefits can go directly to phone accounts operable only by those with biometric cards, ending the massive leakages of current schemes. Mobile phones will soon cover almost the whole country, and biometrics are now used in many countries.

The political benefits of the loan waiver have been exaggerated no less than the economic ones. If only a small fraction of farm families benefit, and many of these have to pay bribes to get the actual benefit, will the waiver really be a massive vote-winner? All Opposition parties have long been demanding loan waivers, and many will promise to make the waivers deeper and wider if elected. It is actually logical for farmers to vote for Opposition parties, hoping to get more than Chidambaram has promised.

Besides, psychological studies show that people are especially unhappy when their neighbours move ahead of them, the more so if the neighbours have received government favours denied to others. Those who have repaid their loans will be very angry that Chidambaram has forgiven the loans of their dishonest neighbours.

Members of joint families will be aggrieved that, despite having less than one hectare per head, their family holding is too large to qualify for the 100% waiver.

All finance ministers, of the central or state governments, give away freebies in their last budgets, hoping to win electoral rewards. Yet, four-fifth of all incumbent governments are voted out. This shows that beneficiaries of favours are not notably grateful, while those not so favoured may feel aggrieved, and vote for the Opposition. That seems to be why election budgets constantly fail to win elections in India. I do not think the loan waiver will change that pattern.